Choosing a Business Structure

In March 2015, about 679,072 new business had been created in the preceding year.¹ All individuals pursuing the dream of exercising their entrepreneurial muscles, will face the same question, “Which business structure should I adopt?”

Each option presents its own set of pros and cons. To complicate matters a bit, the 2017 Tax Cuts and Jobs Act created several key changes that may benefit certain business structures. For example, the new law added a 20 percent deduction of qualified business income for certain pass-through entities. However, service industries (e.g., health, law, professional services) are generally excluded, except where income is below $315,000 for joint filers and $157,500 for other filers. This provision is set to expire December 31, 2025.

This overview is not intended as tax or legal advice and may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding the most appropriate business structure for your organization.

Sole Proprietorship/Partnership

This structure is the simplest. But it creates no separation from its owner. Income from the business is simply added to the individual’s personal tax return.

Advantages: Easy to set up and simple to maintain.

Disadvantages: Owners are personally liable for the business’s financial obligations, exposing their personal assets (house, savings, etc.). It does not offer the prestige or sense of permanence of a corporation or LLC.

C-Corporation

A corporation is a separate legal entity from its owners, making it easier to raise money, issue stock, and transfer ownership. Its life is perpetual and will survive the owner’s death.

Advantages: There may be tax advantages, including more allowable business expenses. It protects owners from personal liability for the company’s financial obligations and may lend a measure of prestige and permanence.

Disadvantages: More expensive to set up, the paperwork and formality are greater than for a sole proprietorship or LLC. Income may be taxed twice, once at the corporate level and when distributed to owners as dividend income.

S-Corporation

After forming a corporation an owner may elect an “S-Corporation Status” by adopting a resolution to that effect and submitting Form 2553 to the IRS.

The S-corporation is taxed like a sole proprietorship, i.e., the company’s income will pass through to shareholders and be reported on their respective personal tax returns.

Advantages: S-corporations avoid the double taxation issue associated with C-corporations, while enjoying many of their tax advantages. Owners are shielded from personal liability for the company’s financial obligations. It provides the prestige of a corporation for small businesses.

Disadvantages: S-corporations do not have all the tax-deductible expenses of a C-corporation. The cost of set up, the paperwork, and formality are greater than for a sole proprietorship or LLC. S-corporations have certain restrictions, including a "100 or fewer" shareholders requirement. Shareholders must be U.S. citizens and the business cannot be owned by another business.

Limited Liability Company

An LLC is a hybrid between a corporation and a sole proprietorship, offering easy management, pass-through taxation, and the liability protection of a corporation. Similar to a corporation, it is a separate legal entity, but there is no stock.

Advantages: LLCs provide the protections of a corporation, but are taxed similar to a sole proprietorship.

Disadvantages: Typically more expensive to form than a sole proprietorship, LLCs require more paperwork and formalized behavior.

Remember, the choice of business structure is not an irreversible decision. You may amend your business structure to accommodate your changing needs and circumstances.

Bureau of Labor Statistics, 2016 (latest data available)

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2019 FMG Suite.

Market Summary

Stephen Eldridge has more than 44 years of direct industry experience, having founded Stephen Eldridge & Company, a retirement plan administration firm, in 1972. Early in his career, following the passage of the Employee Retirement...

Craig Garner, a 26-year veteran of the firm, provides education and assistance in a number of areas, including plan document review, ERISA guidance and ongoing compliance education. Craig also conducts operational plan reviews that...

With over 20 years of experience working in asset management and employer sponsored retirement plans, Sean Riley brings an insider’s perspective to his role as a consultant and advisor for our clients. Sean joined the firm in...

Kevin Whitmore brings almost three decades of securities industry experience to his role as a financial advisor. After earning a B.A. in business and economics from St. Anselm College, Kevin began his career in the securities business...

Robert Batdorf is a senior client portfolio manager and 24-year veteran of Eldridge Investment Advisors, Inc. He brings more than 4 decades of industry leadership and experience across multiple market and economic cycles to the...

Warren joined the firm in 1989 as a Portfolio Manager and financial advisor, concentrating in mid-to-large company retirement plans and 529 education savings plans. Beginning in 2016, he will focus solely on client portfolio management...

Susan Lipsett is a research assistant and administrative assistant supporting the firms’ client portfolio managers as well as financial advisors Sean Riley and Kevin Whitmore. She collects and distributes...

Leslie Maffee oversees the daily operations of the branch office and is a LPL Registered Sales Assistant to Stephen Eldridge and Eric Putney. She has more than 30 years of experience in branch office operations (over 20 years with...

Meg Dworkin provides support for the registered assistants in addition to being a member of the retirement plan team. She has 20+ years of experience in the areas of defined contribution, defined benefit and individual taxation. Meg...

With over 16 years of experience in the investment industry, Stephen Murray provides research analysis and portfolio management. Prior to joining the firm in 2016, he was Director of Research and Portfolio Manager with Harvest Capital...

Justin Eldridge joined the firm in 2016 to assist in the areas of Sales and Research. He graduated from Trinity College with a double major in Economics and Political Science, and earned his MBA in Finance from Northeastern University....

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The content is developed from sources believed to be providing accurate information.
The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals
for specific information regarding your individual situation. Some of this material was developed and produced by
FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named
representative, broker - dealer, state - or SEC - registered investment advisory firm. The opinions expressed and
material provided are for general information, and should not be considered a solicitation for the purchase or
sale of any security.

Copyright 2019 FMG Suite.

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